Will a Capitol Hill Deal Change Anything for the U.S. Economy?

October 16, 2013


So, what’s next? If, as it appears, the dysfunctional law-makers on Capitol Hill have pulled a last-minute deal out of the fire and prevented or at least postponed the debt default crisis, will anything change?

Yes, says one expert – and probably not for the better, as other governments and economies start to question whether U.S. national and financial institutions can still be trusted.

“If Congress reaches a deal, the reaction is already baked into the cake,” says Jack Strauss, chair and professor with the Daniels College of Business School of Finance at the University of Denver. “Otherwise the market would be down over a thousand or two thousand points.”

But Strauss, like many other analysts, is concerned any deal Congress comes up with will only postpone some major political and economic decisions for the next several months. And for the markets, he says, “it means more uncertainty just around the corner…that the U.S. economy – which is gaining traction and recovering from the financial crisis of several years ago – will be further stalled.”

Wall Street, investors and corporations value stability and certainty – and Strauss notes it will probably take the overall economy longer to recover from the uncertainty generated by this crisis.

“Interest rates did spike up the last time, in 2011 in the summer, when we had this problem,” he says. “Interest rates are moving up now because some foreign governments have expressed dismay and concerns about buying Treasuries.”

Strauss’ specialty is international economics and forecasting. He’s also worked with central banks in several emerging markets and says the U.S. dollar has been doing relatively well because of the economic recovery. Also, he notes, “There is no other reserve currency out there: Europe’s a mess, Japan’s a mess, China’s is slowing down, etcetera.”

“But it’s very clear,” he adds, “the U.S. does have long-term fiscal problems that, in the past, we’ve been able to deal with – but it seems we’re not able to deal with today.” And, Strauss says, all these factors should add up to another stock market “correction” of at least 10 percent, with interest rates drifting higher and the dollar drifting lower.

But the biggest damage coming out of this debacle may be to the credibility of America’s institutions, especially on the international stage. Strauss notes the U.S. currently has an advantage over China, for example, because other countries trust our regulatory process. However, he says, “If America can’t solve its domestic problems, how is it going to be able to promise trade deals with other countries? And how is it going to advance American interests abroad if (the president’s government) isn’t backing him?”